1. Suppose an owner of a corporation needs $1 million to finance a new investment. If his total
wealth is $1.2 million, would it better to use his own funds for the investment or to issue stock in
the corporation? What is the owner’s wealth is $1 billion?
2. Firms such as Moody’s and Standard & Poor’s study corporations that issue bonds. They publish
“ratings” for the bonds – evaluations of the likelihood of default. Suppose these rating companies
went out of business. What effect would this have on the bond market? What effect would it have
on banks? [Notes: Please use the framework of asymmetric information to answer this question.]
3. National credit bureaus collect information on people’s credit histories. Please do your research
to name the three biggest ones in the U.S. Suppose that a new privacy law makes it illegal for credit
bureaus to collect this information. What effect would this have on the banking industry? [Notes:
Please use the framework of asymmetric information to answer this question.]
4. For a citizen of the United States, how liquid is each of the following assets? Explain each answer:
(a) Bonds issued by the U.S. government
(b) Bonds issued by corporations
(c) Postimpressionist paintings
(d) British pounds
5. Describe how each of the following events affects stock and bond prices:
(a) The economy enters a recession.
(b) A genius invents a new technology that makes factories more productive.
(c) The Federal Reserve raises its target for interest rates.
(d) People learn that major news about the economy will be announced in a few days, but they
don’t know whether it is good news or bad news.